Loan recast going ‘out of control’: RBI

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SummaryLambasting Indian banks for inadequate credit appraisals, leading to an exponential rise in bad loans

Lambasting Indian banks for inadequate credit appraisals, leading to an exponential rise in bad loans, Reserve Bank of India deputy governor KC Chakrabarty on Saturday said the process of restructuring loans must be abandoned.

Indian banks’ total restructured accounts have touched a massive R3.25 lakh crore by June 2013, as per RBI executive director B Mahapatra. Of this, around R2.7 lakh crore is through corporate debt restructuring.

“Till March 2010-11, things were manageable, as we had around R1.10 lakh crore (in restructuring), but now things are quite out of control," Mahapatra said at the annual banking conference, Bancon, in Mumbai.

At the same event, Chakrabarty said the RBI’s move to provide regulatory forbearance on restructuring of loans at times led to evergreening. “Exemption (of provisioning) on restructuring has killed credit quality.”

In restructuring of large accounts by the corporate debt restructuring cell, Chakrabarty said banks need to be more stringent on large corporate accounts and liberal to small borrowers.

He said there needs to be an independent monitoring of the CDR cell and the bias towards restructuring large accounts must be avoided. In the short-term, Chakrabarty said banks must not only insist on equity participation of the promoter during restructuring, but also assess the source of such equity.

For an NPA account, banks have to provide 100% of the value, while for restructured accounts, banks need not provide more than 15%.

Chakrabarty said even as NPAs are rising, banks are making less and less provisioning. Mahapatra concurred, and said the fall in provisioning is disturbing. While banks’ average provisioning coverage ratio has come down to 45% over the past three years, a more comfortable level of provisioning coverage ratio would be 50-60%, as per the RBI.

Chakrabarty pointed out that bad loans have been increasing even before the global financial crisis hit India’s economic growth, which shows lacunae in banks’ credit risk management.

Stating that more than 12% of banking system’s advances have either turned bad, restructured or written off on technical definition, the deputy governor recommended an overhaul of information management and tightening of credit appraisal systems to fix the NPA issue in the long run.

Because of the lackadaisical approach of banks towards credit appraisal, nearly 50% of the reduction in NPAs has been through write-offs, Chakrabarty said.

He pointed out that banks extended credit to sectors having high NPA levels despite risks involved. High credit growth, NPAs, corporate leverage and frauds are highly

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